Impact of Inflation on Chemical Manufacturers and Their Customers

Impact of Inflation on Chemical Manufacturers and Their Customers

By Diane M. Calabrese / Published February 2023

Photo by iStockphoto.com/z_wei

If there is a sector of the economy that has not been impacted by inflation, we have not encountered it. Measures of inflation come in many forms—month to month, year to year, etc. Let’s just start with the trajectory: up.

     From December 2020 to December 2021, import, export, and producer chemical manufacturing price indexes rose 16 percent. From December 2018 to March 2020, the same indexes had been almost flat. Then, they exhibited a dip in the summer and fall of 2020 before the steep rise began. (All the foregoing is based on a report from the U.S. Bureau of Labor Statistics.)

     For the calendar year 2021 (or minus December 2020), the increase was 12.8 percent, according to BLS. Yet 12.8 percent represents the biggest 12-month change in the history of the BLS record keeping, which began in 2006.

     What does it all mean for chemical manufacturers and customers? For starters, it means adjusting to a new phenomenon.

     “I have worked with chemicals for over 30 years,” says Claudia Hirschochs, president of Vector Chemicals in Youngstown, OH. “I have never seen price increases like the ones we’ve experienced in the last two years.”

     The increases nearly jump off the page. “Chemicals have increased 100-plus percent,” says Hirschochs. “For example, sodium hypochlorite 12.5 percent, also known as bleach, has seen a 220 percent increase.”

     (The increase in the price of bleach is one that has registered even with those buying laundry products in the grocery store. Ninety-nine cents for a half-gallon of bleach is just a memory with the shelf price now at least four times that.)

For manufacturers of chemicals and their customers, the escalation of cost is something that must be managed. But drawing on past experience to find a solution is not easy.

     “This inflationary cycle is unprecedented,” says Hirschochs. “I don’t believe businesses know how to cope with the continuing instability of chemical pricing along with the uncertainty of chemical availability caused by supply chain disruptions and manufacturer production issues.”

     Of course, there has been inflation in the past. But with inflation at a slower pace, many strategies could be deployed to counter its effects.

     “During past inflation times we’ve looked at our expenses to see if we could reduce spending,” says Hirschochs. “We found ways to increase productivity, kept an eye on margins, and had price increases as needed.”

     Hirschochs explains that adding buyers worked too. So, getting new customers was important.

     Because customers experience price increases at every turn, it’s not surprising to them that the prices of chemicals used in their businesses follow an upward trend line. That brings acceptance.

     “Our customers have seen the price increases themselves, everywhere from gas to grocery stores, so they are very understanding when companies have to raise their prices,” says Hirschochs. “No one likes it, but these are the times we’re living in.”

     Find a way to deal with it. That’s the philosophical approach. 

     There’s no denying that the rise in prices of chemicals is real, or that it almost borders on the fantastic in some cases. But to be successful in the chemical sector, a business must adapt to the reality.

     “No one likes price increases, including manufacturers,” says Joseph Daniel, CEO of ITD Inc. in Tucker, GA. “It’s stressful and time consuming.” 

     Doing what’s possible includes acute attention to serving the customer. Prices may be up, but customer service must be sustained at the highest levels.

     “We believe and have found that our customers believe that quality and service execution are superior to pricing in most cases,” says Daniel. “So, we focus on what we can control and charge the prices we need to in order to stay in business.” 

     For Daniel, the experience of this period of inflation is doubly new. “I have never experienced an inflationary period because I wasn’t alive during the last one,” he says. “No one I know in this industry was operating during the ‘70s, and thus no one seems to have any real experience regarding the current situation.”

     Daniel refers to the 1970s, a decade synonymous with oil shortages, gas rationing (alternate days for even and odd plate numbers), and routine interest rates—not the credit card variety—that got to the high side of 15 percent by the time the decade was ending. It’s worth thinking about that period, which stands as evidence that businesses and consumers could work their way through it. Moreover, by the mid-1980s everything, including inflation, was reversing.

Reversal on the Horizon?

     There is no crystal ball, unfortunately, but look to a restoration of predictability in the movement of raw materials, goods, and the provision of services as a requisite. 

     The standard reason given for inflation is too many dollars chasing too few goods and services. To get what’s needed, buyer A is willing to outspend buyer B, and the upward spiral begins. 

     When supply chains were broken in spring 2020 and the federal government nearly simultaneously put money into the hands of its citizens—not for working or producing, but for agreeing to stay home—a unique economic interval began. And it began not just in the United States but also across almost all developed nations.

     Thus, at the first level, the too-many-dollars chasing too-little explanation did contribute to inflation. Look for a reversal to begin if the government resists continuing to “print” money and incentivizes work (instead of compensation for no work in any form). 

     As a corollary, encouraging work also helps employers who still have difficulty finding employees, and that in turn strengthens the economy. Why? Instead of taking subsidies, workers pay taxes. More tax revenue helps bring government expenditures and available funds into closer alignment. It’s not a perfect correspondence, and the federal government will still borrow, but it will borrow less.

     Compounding issues for those in the chemical industry is the war in Eastern Europe. Our readers are well aware of issues with the supply of gas to European countries, such as Germany, that depended on it. Disruptions to gas supply have been devastating for nations (again, Germany is an example) that decommissioned their coal plants. To help those nations, the United States increased export of liquified natural gas (LNG).

     According to the U.S. Energy Information Administration (EIA), overall natural gas exports set a record in 2021 (an average of 10.5 billion cubic feet per day). The LNG component of the exports propelled the increase to a record level.

     Even before LNG was being exported to assist countries that had been dependent on imports of gas from Russia, however, another force was at work: The increase in natural gas consumption by the electric power sector was underway.

     Since 2010, consumption of natural gas by the U.S. electric power sector has grown 53 percent and accounted for one-third of consumption in 2021. Again, the cited figures are according to EIA. [Note: For a continuously updated and precise look at the energy sector in the United States where all contributing fuels fit in the mix, etc., visit EIA.gov.] 

     The US industrial sector uses a great deal of energy, approximately 33 percent of all energy (via fuel and end-power). Within the sector, the production of chemicals consumes a bit more than one-third (37 percent) of the total, topping even petroleum and coal products, which are second at 22 percent. That mix is predicted to remain close to the same in 2023.

     Exports and competition for natural gas from electric power generators have put pressure on prices for chemical manufacturers. So has the lag in completion of drilled wells. But the well situation is somewhat hopeful as drilled but uncompleted wells (stalled during the pandemic) are being completed; the question of permits to drill more is pending with legislators.

     In 2001 coal was the largest source of fuel for generating electricity in 32 states. Today, it is the largest source in just 15 states. And the pressure to use natural gas as an electricity-generating fuel will only grow along with plans to increase renewables (solar, wind) because it serves as a backup source for generation. 

     Natural gas is a feedstock compound to those in the chemical industry. It is used to manufacture commodity chemicals, such as ammonia. With the increase in natural gas prices, ammonia prices go up and so on for its allied compounds (think nitrogen-based compounds). From January 2020 to January 2022, the price of a metric ton of ammonia increased sixfold, outpacing the price of natural gas (per million British thermal units) that increased only fourfold (with the exception of a sixfold increase in Western Europe). 

     Reliability in all dimensions (extraction, quantities, movement, workers to handle) is a must for easing inflation for chemical manufacturers and their customers. So, too, is a stable monetary system with predictable interest rates and tax structure, etc. 

     One way or another there will be a return to equilibrium. Prudent adjustments by government entities that have the means to bolster reliability and stability would bring the softest return. The alternative, a hard return (economic crash), is hopefully not a possibility.